Tax Issues Surrounding Separation and Divorce

A Q&A session to help you understand what divorce means has for your business' capital gains tax and assets...

For business owners the sensitive issue of seperation and divorce can have consequences beyond the personal.

Seperation and divorce can affect your tax matters so here, Alastair Byrne looks at the implications for your capital gains tax and transfer of assets in a question and answer session…

Are there any tax consequences of separation or divorce?

Yes. There are tax consequences of both. Many people overlook the fact that the date of separation is relevant for determining the capital gains tax treatment between spouses and civil partners.

What happens if I want to transfer some assets to my spouse/civil partner after we have separated but before we have divorced?

For capital gains tax purposes, transfers of assets between spouses/civil partners who are living with each other at some point during the tax year will be treated as being carried out at no gain/no loss.

If the separation occurs on say 15 March 2013 then assets can only be transferred at no gain/no loss until 5 April 2013 – a very short window of opportunity. This window of opportunity is often missed if advisors are not aware of the separation for several months after the event.

I’ve missed that window of opportunity – what happens if I transfer assets now, before the divorce proceedings have been finalised?

Once the new tax year has started after you have separated, you can no longer pass assets between you at no gain/no loss. Instead, prior to the decree absolute, you are treated as “connected persons” which means that market value must be used when calculating any capital gains. For example, if Jane wants to give half of her XBank shares to Peter, from whom she is separated, and they are worth £100,000 then she will have to calculate the capital gains tax based on sale proceeds of £100,000 even if she received nothing for the shares from Peter.

What happens if the assets are transferred after the decree absolute?

After the Decree Absolute, you are no longer connected parties for capital gains tax purposes and any transfers of property not covered by a court order will take place for actual consideration, rather than market value. Unfortunately, transfers directed by a court order will still be at deemed market value as you will be connected parties in this instance

What about our family home?

If the family home is sold or transferred to one spouse within 3 years of the departing spouse having last lived in it then there will, in most cases, be no capital gains tax. Instead the gain will be covered by Private Residence Relief.

The family home is subject to a Mesher order. What happens when we sell it in years to come?

When there is a Mesher order, the house is often sold well beyond three years since the other spouse last lived there. In this situation, HMRC accept that the property is held on trust. There is unlikely to be a taxable gain for the departing spouse at the time of transfer to the trust. The property then attracts full private residence relief while the occupying spouse uses it as his/her only or main residence. The departing spouse can elect for their previous family home to be considered as their PRR.

This is not a claim to be made lightly if he/she buys another residence as it may be more beneficial for them to claim PRR on their own residence. This is a complex area and needs to be carefully considered before the financial settlement stage. IHT will not be charged on the creation of the settlement as it will fall within either s10 or s11 IHTA 1984. As it will be a relevant property trust, IHT may become an issue on winding up the trust or on the 10 year anniversary.

What happens if we run a business together and I want to transfer my shares to my spouse as part of the divorce settlement?

In the tax year of separation, the shares can be transferred at no gain/no loss. After that but before the decree absolute, you are connected persons and deemed market value is used in place of actual consideration. However, assuming the shares qualify as business assets then holdover relief will be available to hold over any gain. The spouse who receives the shares will take on the shares at the spouse’s base cost. There will undoubtedly be other issues to consider here and such a share transfer should not be undertaken in isolation.

Alastair Byrne is a partner in JWP Creers LLP, a member of UK200Group Tax Panel

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